 "IMF cuts India's growth forecast for FY16 to 7.3%")
Policymakers in India are not confident of the country’s economic expansion at 8.1-8.5 per cent for the current financial year projected by the Economic Survey. Unlike IMF, they are, though, sure that GDP would grow over 7.5 per cent. On Tuesday, the United Nations Conference on Trade and Development also projected the economy to expand 7.5 per cent for 2015-16. (GLOBAL OUTLOOK)
If economic growth indeed stands at 7.3 per cent as projected by IMF for the current financial year, the expansion would be same as in 2014-15. Even then, the economy would be the fastest growing large economy, as China’s economic expansion is projected to come down to 6.8 per cent in 2015 from 7.3 per cent in the previous year.
The economy grew seven per cent in the first quarter of the current financial year, against 7.3 per cent in the previous quarter.
Recently, Asian Development Bank had slashed India’s economic growth for 2015-16 to 7.4 per cent from its earlier projection of 7.8 per cent.
As inflation remains subdued, IMF saw room to cut nominal policy rate by the Reserve Bank of India (RBI), but cautioned it against cutting the real rate (adjusted for inflation).
RBI had cut repo rate by 50 basis points last month.
India’s “near-term growth prospects remain favourable,” said the IMF, as the “decrease in the current account deficit has lowered external vulnerabilities”. IMF expects India’s current account deficit to be 1.4 per cent of GDP in 2015-16, rising to 1.6 per cent in 2016-17.
In its WEO, released ahead of the IMF-World Bank meeting at Lima, Peru, IMF also scaled down global growth projections. It now projects world GDP to grow at 3.1 per cent in 2015 lower than its earlier forecast of 3.3 per cent. In 2014, world GDP grew at 3.4 per cent. Global growth is expected to rebound to 3.6 percent next year.
“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago,” said Maurice Obstfeld, IMF’s economic counsellor and director of the research department.
The Fund projected advanced economies to grow modestly this year. The pickup in this year reflects “a strengthening of the modest recovery in the euro area and a return to positive growth in Japan, supported by declining oil prices, accommodative monetary policy, and improved financial conditions, and in some cases, currency depreciation”. The prospects of emerging markets and developing economies vary, but the overall outlook in 2015 is poor, with growth for these economies projected to fall from 4.6 per cent in 2014 to four per cent in 2015.
The sharp decline of inflation in India has created space for cuts in nominal policy rate, says IMF. While it expects inflation to decline further in 2015, reflecting the fall in global oil and agricultural commodity prices, it cautions against loosening of monetary policy, saying: “Real policy rate needs to remain tight for inflation to decline to the inflation target in the medium term, given the upside risks to inflation.”
Reserve Bank Governor Raghuram Rajan had argued in favour of maintaining real interest rates in the range of 1.5-2 per cent. Government securities currently yield 7.5 per cent. With IMF expecting inflation at 5.4 per cent in 2015-16 and at 5.5 per cent in 2016-17, RBI's own estimates place consumer price index-based inflation at 5.8 per cent. This effectively translates into a real interest rate close to the lower end of RBI’s band.
On fiscal policy, the Fund argues in favour of maintaining a tight control over the fiscal deficit while making the case of tax reform and a reduction in subsidies. With balance sheets of the corporate and banking sector under stress, it says “financial sector regulation should be enhanced, provisioning increased and debt recovery strengthened”. It calls for reforms to relax long-standing supply constraints in the energy, mining, and power sectors, moving towards a market-based pricing of natural resources and addressing delays in the implementation of infrastructure projects.
But even after lowering growth projections, IMF remains pessimistic on the outlook for global growth saying that global growth is likely to fall short of expectations. It outlines five factors — lower oil and commodity prices; a sharper than expected slowdown in China; disruptive asset price shifts and a further increase in financial market volatility; appreciation of US dollar; and increased geopolitical tensions that could potentially derail global growth.
The Fund also projected world trade, both merchandise and services, to grow 3.3 per cent in volume terms in 2015, a shade lower than 3.2 per cent in 2014. The trade would expand 4.1 per cent next year, according to WEO.